Preprint Article Version 1 This version is not peer-reviewed

The R^2 and the Seven Events in Hong Kong: A New Look at Return Synchronicity and Price Efficiency

Version 1 : Received: 24 September 2018 / Approved: 25 September 2018 / Online: 25 September 2018 (04:13:32 CEST)

How to cite: Cai, J.; Li, F.; Petsas, I. The R^2 and the Seven Events in Hong Kong: A New Look at Return Synchronicity and Price Efficiency. Preprints 2018, 2018090474 (doi: 10.20944/preprints201809.0474.v1). Cai, J.; Li, F.; Petsas, I. The R^2 and the Seven Events in Hong Kong: A New Look at Return Synchronicity and Price Efficiency. Preprints 2018, 2018090474 (doi: 10.20944/preprints201809.0474.v1).

Abstract

This paper identifies a dilemma in the relationship between R^2 and price efficiency: After comprehensively studying the R^2 change around 7 well-known corporate events, neither the traditional understanding of R^2 as price inefficiency, nor the behavioral way of R^2 as price efficiency can explain the observed R^2 change around the events. We adopt an alternative methodology to replace the standard difference-in-difference regression and directly decompose the R^2 change. We find that, due to the endogeneity of events, the changes of R^2 are over-estimated. We further propose that in the event study setting, the R^2 change may be simply the consequence of the inflow/outflow of some trend-chasing investors, and it may be detached from price (in) efficiency. Empirical evidences are consistent with this hypothesis.

Subject Areas

price efficiency; R2; Hong Kong stock market data

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